In the recent earnings call, Nokian Tyres (TYRES.HE) announced a robust performance for the third quarter of 2023, despite a challenging car and tire market. CEO Jukka Moisio and CFO Niko Haavisto reported a 14% increase in net sales in comparable currencies, amounting to €314 million, attributed to market share gains and improved availability of passenger car tires, especially in Central Europe and the Nordics.
The company's EBITDA rose to €58.8 million, with an 18.8% margin, and operating profit increased to €30.4 million, representing a 9.7% margin. Profitability was aided by higher sales and reduced raw material costs.
Key Takeaways
- Net sales increased by 14% in comparable currencies to €314 million in Q3 2023.
- EBITDA reached €58.8 million with an 18.8% margin; operating profit was €30.4 million with a 9.7% margin.
- Capital expenditures for the quarter were €101 million, mainly for the new Romanian factory.
- Net debt stood at €800 million, with an expectation to decline after 2024.
- The Romanian factory began production in July, with a grand opening in September.
- The company maintains guidance for significant growth in net sales and operating profit for the year.
- Paolo Pompei has been appointed as the new President and CEO, effective January 1, 2025.
Company Outlook
- Nokian Tyres expects net sales and operating profit to grow significantly throughout the year.
- The Romanian factory is on schedule and will increase production capacity for winter and all-season tires.
- The company anticipates improvements in Q4 due to seasonal cash flow dynamics.
Bearish Highlights
- The overall demand in Europe remains below pre-COVID and pre-Ukraine conflict levels.
- Consumer trends in North America are shifting towards lower-tier brands.
Bullish Highlights
- Positive trends noted in winter tire preorders, particularly in the Nordics and Canada.
- Favorable passenger car tire margin expected for Q4, supported by beneficial product mix.
Misses
- An inventory write-down of approximately €11 million due to the Red Sea crisis affecting summer product deliveries.
Q&A Highlights
- Raw material costs are moderating, influenced by oil prices, with expected increases due to new regulations.
- High receivables and seasonal cash flow dynamics are expected to improve in Q4.
- North American operations are focused on local production, with no exports to Europe.
- Available liquidity of €300 million, with an untapped revolving credit facility of the same amount.
- Estimated CapEx for 2025 projected at around €200 million, primarily for new equipment in the Romanian facility.
In conclusion, Nokian Tyres has managed to navigate through market difficulties to post an increase in net sales and profitability. The company's strategic investments, such as the Romanian factory, are set to bolster future production capabilities. With new leadership on the horizon and a clear strategy for managing capital expenditures and liquidity, Nokian Tyres appears to be positioning itself for sustained growth in the coming years.
Full transcript - None (NKRKF) Q3 2024:
Paivi Antola: Good afternoon from Helsinki and welcome to Nokian Tyres Third Quarter Results Conference Call. My name is Paivi Antola and together with me I have in the call the President and CEO, Jukka Moisio; and Niko Haavisto, the CFO. And as usual, we have some prepared notes and then after that we'll have a Q&A. So Jukka, please go ahead.
Jukka Moisio: Thank you, Paivi and welcome on my behalf and indeed we have some prepared notes and we have a presentation with the Page 1 heading is Market Share Gains Driving Sales Growth in a Weak Market and Romanian factory Progressing on Schedule. And I move to Page 2 which is then Q3 Net Sales and Segments Operating Profit Increased, that's the heading. So our net sales were €314 million which is about 14% higher in comparable currencies. We had marked share gains which were driven by the improved passenger car tire availability. Geographically, the strongest growth in the quarter were Central Europe and the Nordics. Segment's EBITDA at €58.8 million versus €46 million prior year and percentage -- margin percentage is 18.8% versus 16.7%. Segment's operating profit in the quarter at €30.4 million versus €19.6 million a year ago, a 9.7% margin. Main driver for the profitability improvement is higher sales and lower raw material cost. Also, overall statement of the quarter is that car and tire market is weak and it's difficult to estimate market and consumer behavior going forward. I move to Page 3, some of the key figures. And first of all, to state that the investment phase approaching its end and therefore, the net debt in 2024 is peaking and from 2024 onwards the net debt is expected to go down and the cash flow is turning positive. We've had a negative, strongly negative cash flow in '23 and '24 based on the investment requirements and the build of Romanian factory as well as the completion of Dayton investment and at the same time having shortage of or big availability of tires because we lack the production capability. I call out some key numbers on Page 3. One is the capital expenditures. So in the quarter, we spent €101 million mostly in Romanian factory and year-to-date, 9 months, €260 million versus €157 million a year ago. Also, net sales at after 9 months, €875 million versus €805 million and segment's EBITDA at 13.5% versus 12.2% in '23. Return on capital employed at this moment 12-month rolling is 4.2%, equity ratio 49.6% versus 60.1% and indeed gearing at 64%. And interest-bearing net debt at €800 million this is the highest number we will see. From this moment onwards, this number will go down. And I now hand over to Niko to talk about financial numbers. Niko, please go ahead.
Niko Haavisto: Thank you, Jukka. I will go through the segment numbers. So on Page 4, in the Passenger Car Tyres segment, we had higher sales and improved profitability. And this was driven especially by our Central Europe. And the average selling prices with comparable currencies, however, decreased. Profitability, we improved there due to the higher volumes and lower material costs. I need to point out that in our Q3 numbers, the non-IFRS exclusions included the inventory write-downs of the contract manufacturing. And as we've said earlier in the year, these are the products that came in late and we wanted to sell these contract manufacturing summer products during the Q3 now. We tried that earlier in the summer, didn't -- or in the season, didn't manage to do that as they came in late but did that now in Q3. In the table there below, you can see the segment's operating profit landed at €34.4 million and with the operating profit percentage of 16.4% compared to last year's 11.1%. On the Page 5, we have the Passenger Car Tyre Business Bridge. So first, there is the net sales bridge and there you see the volumes impacted heavily. Then on the price side, price and mix, it was a negative minus €18 million as well as the currency still had headwind there, minus €2 million on the sales level and landed at €210 million in terms of net sales. On the operating profit table, there on the low bottom of that page, we see that once again the volume gain on the profit was €26 million. Price and mix €18 million and then the rest netted roughly €8 million and we landed with €34 million in terms of segment's operating profit in Q3. Then a little bit split year-on-year. The Passenger Car Tyres, still the quarterly change is there. There you see that the sales volume gained 35.4%, so clear increase. And the trend there is what we want to see as well. And then in terms of price and mix, you see there minus 10.5%. But without this exclusion with the write-down it would be on the level of 3% in terms of price and mix. And that would come mainly from the mix. Then the currency is, of course, still a headwind but on much more moderate level than in the prior year. On the Page 7, when we go to our Heavy Tyres segment, there the story continues. The net sales are decreasing and that's mainly due to the weak OEM market. I think we have visibility but it doesn't look too promising when we are looking towards the year end. Profitability, I think that is on the level that we can be proud of. The 12.9% is actually better than what we did last year. So this tells that we have the costs in control. And we had the production temporarily adapted during the summer break to meet the demand in the market. And then finally, the last segment, the Vianor, there we see that the sales are at last year's level or slightly increased compared to last year. But what we are facing is the negative segment's operating profit and this is mainly due to the inflation which we've said earlier and also, we are facing quite a weak business-to-business market there. Of course, now when the Q4 comes and really the season kicks in, we believe that we are well positioned there going into the Q4. Then the final, the guidance for this year, we've said that it's unchanged, i.e., that our net sales with the comparable currencies and the segment's operating profit are expected to grow significantly compared to last year. And with that, I hand back to Jukka.
Jukka Moisio: Thank you, Niko. Some of the other highlights of the quarter. Romania factory, first of all, progressing budget and schedule and we had the first tire manufactured in July and had a grand opening in September. Production will begin with the manufacture of Central European winter and all-season tires. Also, financially, we got €150 million European Investment Bank loan to finance the factory. And also in August, we got the European Commission approval for Romania state aid measure to be paid and to -- that to support the establishment of the factory. And as mentioned, this state aid has been approved but hasn't been paid, will be paid progressively step by step in '25, '26 and some remaining amounts in '27 based on the completion of the factory. On the Page 11 you see the aerial photo of the factory, so 100, 000 square meters, about 16 football fields. If you look at the European football field size, about 16 under one roof. And the build-up area consists of building -- mixing building on the left-hand side, production building in the middle, including the office on the right-hand side, not the blue one but the one which is attached to the production building. And then finished goods warehouse and as mentioned earlier that this footprint land area allows tripling the size of the factory in the future years. So the original investment is up to 6 million tires but you can triple that size in coming years if the investment decisions are being made. On Page 12, Romanian factory about benchmark in sustainability. So it's going to be a CO2 emission free. That means that all electricity used at the factory is CO2 emission free. Part of the electricity will be generated by on-site solar power units and the rest will be sourced without CO2 emissions. We have innovative and electric boilers which will then use the CO2 emission-free electricity to generate steam for curing. Energy efficiency, obviously the tire manufacturing process is very energy efficient and using the most modern technology and the machinery. On Page 13, just to remind that the birthday product of 2024 is a winter tire, so it celebrates 90th anniversary. So that's our innovation long time ago, still very strong product and as the winter season is coming, just reminding everybody that the world's first winter tire was invented in 1934 and even today with Hakkapeliitta 10 and Hakkapeliitta R5, number 10 being a studded tire, R5 being a non-studded tire, they are in the podium places in several magazine tests performing extremely well in the winter conditions. And that will remain also in the future, that the key of our innovation will to make sure that we have tires made for demanding conditions. Also in the quarter, Paolo Pompei was appointed the President and CEO of Nokian Tyres and he will start in January 1, 2025. And finalize the presentation and prepared comments with our purpose, we want to make the world safer by reinventing tires and how they are made, over and over again. And with that, I hand over back to Paivi. Paivi, please go ahead.
Paivi Antola: Thank you, Jukka. Thank you, Niko. Before we go to the questions from the audience, I would actually have 2 questions for you, Jukka. So we have a new President and CEO starting in January but you will continue until that?
Jukka Moisio: That is correct. So I will continue until the end of December and then hand over to Paolo. And we have, of course, overlapping transitions during the month of November and December so that Paolo will be full speed when he starts in January. And, obviously, those take places in the budget meetings and various other management team meetings so that, indeed, it's not so that I leave when he comes but we overlap at this moment and in coming weeks and also month of December.
Paivi Antola: Very good. And another very important question, do you already have winter tires in your car?
Jukka Moisio: I have, actually, in my wife's car, we have a studded tires Hakkapeliitta 10 and tomorrow, I will change to my car Hakkapeliitta 10 winter tires. I am a true believer of studded tires. I know, Paivi, that you are a true believer of friction tires and I know that people are varying between these beliefs that some people like friction tires, other people like studded tires and really depends where you drive and how you drive. I go a lot to countryside and so, therefore, I rely on studded tires. But I know that you are a city person and you have friction tires.
Paivi Antola: That is correct. Now once we have discussed these 2 very important questions, we would be ready for the questions from the audience, please.
Operator: [Operator Instructions] The next question comes from Akshat Kacker from JPMorgan.
Akshat Kacker: Three from my side, please. The first one on the passenger car profit bridge. Could you just explain what drive the supply chain improvement year-over-year, the €8 million that we see in that bucket? And also on the bridge, if you could talk about your assumptions for raw material costs as we think about the next 2 quarters, that will be helpful. The second question is mainly on working capital. Yes, there's a seasonal pick up in the cash drag on the business in the first 9 months but I noticed that the receivables look much higher than what they are usually. So could you talk about your expectations for working capital improvement in the fourth quarter? And how should we think about that for the full year as well? And the last one is on the ramp up in Romania. Could you just talk about your expectations for volumes coming out of that plant for 2025 as to-date, please?
Niko Haavisto: Okay. Yes, this is Niko. So if I start from the raw materials, so we've said that we see that they're moderating the prices. Of course, there is a lot of fluctuation as we speak. And as most of you know, that they are really dependent on the oil price, so there is a big correlation. Going into next year, I think the EUDR and kind of the certified natural rubber will have an increase in the raw material prices. But at this point, we see that that's quite moderate. Then in terms of the net working capital, yes, you are correct that there were increase there and the receivables are on the high side. Of course, much of our sales also were tilted towards end of the quarter. So in that sense that increased as well. And in Q4, as you know as well, that we are getting most of the accounts receivables paid in the month of December. And as Jukka said in his presentation that net debt is at its peak as we came out from the Q3. So in terms of cash flow, we feel that we are well -- it's in good hands also going forward. Then you had the question about the supply chain. So Jukka, will you take that?
Jukka Moisio: Yes, that was the Romania factory. And what do we expect in 2025? So, obviously, we've said that we'll start the commercial production in 2025. We'll start with the winter and all-season tires. We expect that the volumes are, if the installed capacity at this moment is about 3 million tires and we keep on investing new equipment throughout or installing new equipment throughout 2025, we will then ramp up towards halfway -- more than halfway in '25 and then of the currently installed and then continue in '26 with the new installations that we do during the course of '25. And progressively, step by step, we ramp up. So it's -- to give an exact number is difficult. But then, obviously, ambitions are that as the equipment are being installed, we ramp up them as they come up on stream.
Akshat Kacker: One quick follow-up, probably I missed it. Could you just explain the €8 million positive on the profit bridge that comes from the supply chain on a year-on-year basis?
Niko Haavisto: Yes. There, we have quite a few positive things. One is, of course, that we've been able to lower the kind of external warehouses that we have been heavily involved with, especially now that we have the finished goods warehouse in our Dayton factory as well and we see the full impact going towards the year end. I think that's the main or those are the main drivers there.
Operator: The next question comes from Artem Beletski from SEB.
Artem Beletski: Yes. First of all, I would like to wish you all the best Jukka. Years at Nokian Tyres have been definitely pretty challenging with first COVID and then war in Ukraine but you navigated well through this exceptional conditions and the reposition of the company. But maybe then going to a couple of questions what I had on my mind. So first one is, in general, when it comes to winter tire season, could you maybe provide some comments, how it actually has started when it comes to Europe and also North America? And then, maybe one question relating to the guidance which was kept unchanged. There has been some expectations that maybe it could be detailed. Could you provide some parameters what comes to, for example, Q4, what should we expect in terms of PCT volume growth? How do you see the outlook? Is, for example, Q3 a good proxy for it? And maybe some commentary in terms of price/mix development?
Niko Haavisto: So first of all, thank you, Artem. Thank you for your kind words and so on. We obviously have been through a difficult time and demanding time for Nokian Tyres. We have repositioned and not me, it's the team. And I have to say that the resilience of the team has been remarkable given that we faced some unusual times, not only as of many other companies having been active in Russia and facing the situation that happened in 2022. However, we are now in front of something new because things are going well and new things are happening in terms of innovation and capability and so on. But let's go to the situation of the winter tires. So obviously, we see winter tire season about to start. You look outside and you see the sun is shining. However, the forecast is that things will change. We see a relatively good momentum in winter tires in Nordics. We see a good momentum in North America, especially in Canada. The U.S. is more weather related and you see that it's quite warm in the North America side. We had good preorders for the season but of course, the season to materialize require that -- that all those preorders materialize, we need that the season starts and the weather changes. But when going into the season, it looked quite strong in terms of preorders. What can we expect in terms of volume development compared to Q3? Perhaps, you'll see somewhere between Q2, Q3 type of a volume development, maybe not as strong as in Q3 but nevertheless, a progress in terms of where we are going. And this is in line with our ambition for 2024 when we said that with better availability, with more tires, we aim to gain market share. This is what we have been doing and we try to continue to do that till the end of the year. Guidance; guidance is that we continue with the significant top-line improvement expectation as well as significant segment operating profit improvement expectation.
Operator: The next question comes from Miika from DNB Markets.
Miika Ihamaki: Yes, a couple from my side. So first, in Americas, you delivered flat year-over-year growth which should imply that there is some fixed cost under absorption as you have increased your capacity there recently. At the same time, you had this overall positive supply chain impact in the Passenger Car Tyre EBIT bridge. So I'm just wondering what explains this. You mentioned the positives but can you explain, did you actually experience a lot of cost under absorption in North America due to this? And you could perhaps a little bit give color on the North American replacement and your expectations?
Niko Haavisto: Yes. If I start with the North America. So there, yes, it's true that our volumes are picking up in terms of the own production. At the same time, though, I need to say that, as I think we've discussed in these calls as well, that it seems that consumers are moving towards the kind of the Tier 3 and Tier 4 brands as well. So that's clearly seen in the market environment. And also, kind of the pricing element that has been there is a thing that we need to be really careful, i.e., that we are able to keep the prices going forward in the North America market as well.
Jukka Moisio: Having said that, you asked about the volume development and so on but every week, we see an improvement in Dayton volume. So the latest week was the highest ever volume. So, of course, the progress happens but we still have a lot of work to be done in order to make sure that the throughput gets to a level where we want it to be as well as the efficiency and all that. This work is very much going on, so we have all the focus on that work. But no new investments are needed or anything like that, so it's more work on a daily basis to improve the efficiency throughput and so on. But so far, so good. Things are going forward.
Miika Ihamaki: And then, just follow-up on the raw material costs. So I kind of read from Q2 that you expected the raw material costs to turn into headwind during the H2. However, now we saw that you benefited actually from lower raw material costs. At the same time, you removed the cost outlook assumption. So how should we read into this? You mentioned that there should be modest increase into next year but how about on the underlying costs for passenger car tire especially?
Niko Haavisto: For the rest of the year, I think it's quite moderate that what we see there. And in terms of this year's kind of the profitability, what I'm seeing more and discussing now is the 25% and what we see there in terms of raw material. Yet, I need to say at the same time that, of course, we are hedging part of the raw material purchases but it's fluctuating a lot at this point.
Miika Ihamaki: So how should we think about that passenger car tire margin into Q4? Now at sort of a stronger level -- much stronger level year-on-year but should we think that there are now some temporary benefits that won't support you in Q4?
Jukka Moisio: We expect that the mix should be quite favorable in Q4 and therefore, the margin should be at a good level. But obviously, raw material has a slight impact either depending really on oil prices and the shorter fluctuations. But mix wise, we expect that the Q4 is quite beneficial to us.
Operator: The next question comes from Thomas Besson from Kepler Cheuvreux.
Thomas Besson: I have 3 questions as well, please. Firstly, on contract manufacturing, I'd just like to clarify completely what you've said. Could you confirm exactly how much has been written-down? I think it's €10 million, €15 million. And just tell us exactly what happened, who was supplier when the products arrived, if some of them can be sold or not and whether contract manufacturing is still part of the plan while your Romanian plant ramps up? That's question 1. Question 2 is a lot easier. North American volumes, can you just remind us how much of what you sell in the U.S. is built in the U.S and how much is imported from Europe? And lastly, that maybe kicking but it's quite high €800 million, can you remind us your available liquidity and your 2025 CapEx plan, please? And Jukka, best wishes as well for the next part of your life.
Niko Haavisto: Okay. I'll start with the liquidity. So we have the €300 million RCF, the revolving credit facilities untapped. So that is available, the €300 million in terms of cash available on top of what we have in the bank accounts. Then on the write-down of the inventory, so that was roughly €11 million that related directly to the inventory write-down and that was due to the Red Sea crisis and for the product -- summer product arriving more or less after the summer. And Jukka, you'll take the North America question.
Jukka Moisio: Yes. So the North America, it's pretty much the same mix. So we sell started winter tires, friction tires out of Nokian to North America, so predominantly Canada, northern part of the U.S. All the rest in the market, all season, all weather, light truck, et cetera, is made in Dayton and sold in North America. And there are no products made in Dayton that come to Europe.
Thomas Besson: Can I follow-up, Niko, with the '25 CapEx plan, please?
Niko Haavisto: Can you repeat the -- your final question?
Thomas Besson: Yes. What is your estimated 2025 CapEx at this plan?
Niko Haavisto: Yes. I don't think we have disclosed that yet but my understanding at this moment is roughly €200 million.
Jukka Moisio: So that'll be, yes, significantly down because essentially, it's new equipment at that are at TBMs or tire building machines and similar in Oradea. And those are the commitments that we made when we built the factory but beyond that, the capital outlay is relatively modest. Yes.
Operator: The next question comes from Mika Karppinen from Danske Bank.
Mika Karppinen: Yes. You sold quite a lot of summer tires during Q3 compared to sort of the typical Q3 quarter. So could you elaborate a bit the sort of inventory level development in distribution especially in Central Europe and also next season in 2025?
Jukka Moisio: Our understanding is right now that when we look at the inventory levels, whether it's about winter tires or seasonal and so on, that they are becoming normalized. So obviously, now just ahead of the winter season which is about to happen, so the winter tire inventories are higher but otherwise, they are approaching the normalization. This is our understanding at this moment. Obviously, if you look at the overall demand in Europe compared to the years prior to Ukraine or COVID then we are still below in terms of overall demand but inventories are normalizing.
Mika Karppinen: Also in summer tires?
Jukka Moisio: Also in summer tires.
Operator: [Operator Instructions] There are no more questions at this time, so I hand the conference back to the speakers.
Paivi Antola: If there are no additional questions, then it's time to finish the call. Thank you all for participating and joining. And thank you, Niko. Thank you, Jukka.
Jukka Moisio: Thank you, Paivi. All the best.
Niko Haavisto: Thank you.
Paivi Antola: Thank you.
Jukka Moisio: Bye.
Niko Haavisto: Bye-bye.
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